Summary
In this blog post, you’ll learn everything you need to know about using compound interest to leverage your numbers and build big wealth. We’ll show you the good sides and the bad — and you can take it and run with it.
We’re talking about something we think EVERYONE should know about and understand. Whether you’re an everyday consumer or a hardcore investor, these two little words can change your financial life.
Albert Einstein once called compound interest “the 8th wonder of the world,” and for good reason. He said, “He who understands it earns it, he who doesn’t pay it.”
Given the choice, we want to be the ones who earn it (the $$$), don’t you⁉️
Obviously.
Sooo, first, we need to understand what it is, and then you can learn how to leverage it to your advantage. This is a super saucy wealth-growing tool when applied the right way (which we’re going to teach you, of course!), and can be a real tough break when forgotten about or misunderstood.
Here’s the lowdown of what you’ll learn today.
- What is Compound Interest?
- How Does Compound Interest Build Wealth?
- Compound Interest and Debt
- How to Stay on the Good Side of Compound Interest
Let’s get into it! 🧐
So…What the heck is compound interest?
We’re glad you asked. 😉
Benjamin Franklin described compound interest by saying, “Money makes money. And the money that money makes, makes money.” 🤑
That’s pretty accurate, Ben. To say it a bit more technically…
It’s the interest on a deposit or loan that grows over time.
There are two types of interests when it comes to investing:
Simple interest grows your assets linearly, meaning the adding of interest is based on the original amount of money, and not on the interest it earns.
Compound interest grows your assets exponentially, meaning interest is based on the original amount AND the accumulated interest.
Simple interest is safer when it comes to borrowing money because you’re not paying interest on interest. Compound interest, when investing your money, is what’s going to bring in the most reward for your investment. The way we like to look at it? Over time, you earn more money on top of your earnings, because the interest builds on itself. That’s truly how to make your money work for you.
Coooool, right?! 😎
The rate of growth for compound interest depends on the frequency of compounding. The higher number of compound periods = greater compound interest. Now the question is…
How Does Compound Interest Grow Wealth?
Now that you have a basic understanding of what compound interest is, let’s talk about the good stuff. How does it make you more money?
You know us. We LOVE examples. So, let’s play this one out together…
Say you put $10,000 into a savings account with a 2% interest rate that compounds annually. After one year, your principal plus interest is $10,200. You made $200, which is fun…BUT WAIT…It gets soooo much better.
After two years that interest kicks in, and you now make interest on your interest. $10,200 becomes $10,404 and keeps growing. After ten years it’s has made you over $2000 extra ($2,189.94 to be exact). 🤓
That’s a lot of extra cash for doing nothing and we looooove to see it.
Now let’s talk about the other side of it, and how it can be risky when not used properly.
Compound interest and debt
Seeing your savings compound year after year is amazing. Watching the interest on borrowed money compound year after year?
It’s NOT cute.
Remember, when it comes to debt with compound interest, the amount you owe will grow each time the interest compounds.
Personal loans can have a really high-interest rate as is, depending on things like how high the principal amount is and your credit score. So, imagine the interest on a 20% interest loan.
Yikes. 😨
That interest adds up quickly when it compounds. This happens a ton in high principal loans like student loans and mortgages and can have a devastating effect on a person’s financial future.
BUT we’re here to help you use the power of compound interest for GOOD.
How to stay on the good side of compound interest
Ben Franklin and Albert Einstein clearly knew about the power of compound interest. They weren’t wrong. 🤔
Staying on the right side (AKA the money-making side) of it is essential.
Sooo, how do we do it? We would never leave you hanging without giving you some simple tips.
No. 1 Save early to maximize the effects of compounding.
When investing, the earlier you start, the longer you have for that interest to work its magic on your wealth.
No. 2 Compare interest rates.
Rates are NOT created equal. Make sure you do a little research and shop around to find the right one for you.
No. 3 Pay off debt as soon as possible.
Make this a priority for the health of your financial future. Don’t stress…just do your best and keep chipping away.
No. 4 If you must borrow, go for the lowest interest rate.
It makes sense when you think about…high rates are good for investing (because you make more), low rates are good for borrowing (because you pay less). ?
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In summary, interest is going to grow whether it’s applied to debt or investments. (Because it’s saucy like that.)
But understanding what you’re dealing with is a huge step towards leveraging it in your favor, and using its power for good. We hope this knowledge helps you cut down on debt and grow your income, giving you more control of your future. We’re all about helping you reach your financial goals, whatever they may be, so don’t hesitate to contact us with any investment questions you have‼️
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